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Payday lenders may seem to be everywhere, but they were not always there. The first payday stores opened in the early 1990s – a byproduct of the same anything-goes deregulatory mania that led to a wave of booby-trapped mortgages and the financial and economic meltdown of 2008.

Almost as soon as they appeared on the scene, faith leaders and consumer and civil rights advocates called for rules to rein in the abuses of an industry whose business model is to advertise a form of “help” that consistently makes things worse, trapping people in long-term high-cost debt and imposing more economic distress on communities.

After a quarter of a century, these efforts are making progress. Fourteen states have meaningful regulations and the first nationwide rules are being developed by the Consumer Financial Protection Bureau (CFPB), the new agency established after the 2008 crisis to bring basic standards of fairness to the financial marketplace.

But the industry is also pressing ahead, employing new loan models and a battery of technological and legal ploys intended to skirt the rules, both existing and anticipated.

Senator Jeff Merkley D-Ore.), a longtime champion of consumer rights, has introduced legislation to address some of these evasive maneuvers. His Stopping Abuse and Fraud in Electronic Lending (SAFE) Act would make it easier to uphold the interest-rate caps and other measures taken by the states. Merkley’s bill would also bolster the effectiveness of the Consumer Bureau’s efforts to require payday-style consumer lenders to do what other lenders do: verify a borrower’s ability to repay before a loan can be issued.

One big problem, for the CFPB as well as the states, is the fact that more and more payday lenders now do business online. Some companies hide from view, using anonymous domain registrations and websites with no physical contact information. Others, while describing themselves as payday lenders, turn out to be “lead generators” who collect personal information and then auction it off to lenders and other marketers. It is very hard to take legal action against criminals who have encased themselves in online camouflage. It gets even harder when they claim to be doing business from overseas or from Native American reservations in order to assert tribal-sovereignty privileges.

Online or out on the street, the basic formula is the same. These lenders charge triple-digit interest rates (nearly 400% on average) and are prepared to issue a loan as long as they can gain access to someone’s bank account – regardless of whether the borrower can actually afford the loan. Their standard, in other words, is the ability to collect, not to repay. In fact, while the industry promotes its products as short-term loans, most of its profits come from people who remain on the hook for months at a stretch and often end up paying more in fees than they borrowed in the first place.

Those who borrow online face special perils. They are often required to provide personal and financial information in loan applications – data that may be bought and sold by unregulated lead generators, loan brokers, lenders, and others. In some cases, this information is used to defraud people two or three times over.

Senator Merkley’s bill seeks to address these problems in three ways – by helping consumers regain control of their own bank accounts; by establishing standards of transparency for online lenders; and by cracking down on lead generators and other third-party predators. More specifically, the SAFE Act would require banks and other lenders to abide by the rules of the states where they do business; prevent third parties from using remotely created checks (RCCs) to withdraw money without an account-holder’s express pre-authorization; prohibit overdraft fees on prepaid cards issued by payday lenders in order to gain access to consumers’ funds and pile on extra charges; and ban lead generators and anonymous lending.

The great majority of Americans, regardless of political party, favor strong action to end the scourge of abusive payday, car-title, and other high-cost, debt-trap consumer loans. By supporting the SAFE Act and standing up for the complementary efforts of the states and the CFPB, members of Congress can heed this loud, bipartisan call from their constituents.

— Gynnie Robnett

Robnett is Payday Campaign Director at Americans for Financial Reform. This piece was originally published on The Hill’s Congress Blog.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to invigorate consumer financial protection by consolidating responsibility for those laws’ interpretation and enforcement in a single agency. Even before the CFPB opened its doors, industry forces set out to weaken it through bills that would change its single-director structure, among other means.

They lost that fight in Congress – repeatedly. But now the CFPB’s opponents have been given a glimmer of hope by the three-judge panel deciding a mortgage firm’s appeal of a CFPB enforcement order. If those judges follow Supreme Court precedent, however, that hope will be short-lived and the challenge to the CFPB’s structure will fail, just as it has intwo prior federal district court cases.

The latest case involves a company, PHH, which has been ordered to pay $109 million in restitution for illegal kickbacks to mortgage insurers that caused PHH’s customers to pay extra. After a full hearing before an Administrative Law Judge and then the CFPB’s Director, PHH appealed the CFPB’s decision to the U.S. Court of Appeals for the D.C. Circuit. Among a slew of arguments raised by the company, the court expressed particular interest in one. The three-judge panel, which will hear oral arguments on April 12, hasasked the parties to focus on the constitutionality of statutory limits on the president’s authority to remove the sole head of an agency like the CFPB.

By statute, the president may remove the CFPB Director only for “inefficiency, neglect of duty, or malfeasance in office.” 12 U.S.C. § 549(c)(3). PHH argues that the Constitution requires an agency headed by a single officer to be removable by the president without cause. Fortunately, Supreme Court precedents defining the scope of the removal power foreclose that argument.

The central flaw of PHH’s argument is that the Constitution is silent about whether an agency should be headed by a committee or a single officer. In fact, prior litigants have argued that multi-member heads of agencies are constitutionally suspect. The Supreme Court rejected that argument in Free Enterprise Fund v. Public Company Accounting Oversight Board (2010), embracing the view that agencies with a single head or a multi-member commission are constitutionally equivalent.

The Supreme Court decided in Humphrey’s Executor v. United States (1935) that statutory restrictions on the removal of Federal Trade Commission (FTC) commissioners, and by extension the heads of other administrative agencies, were constitutional. To support the flimsy claim that there is a constitutional difference between single-director and multi-commissioner agencies, PHH relies on stray language in Humphrey’s Executorreferring to the FTC’s character as a multi-member body and suggesting those passages add up to a constitutional limitation. But Humphrey’s Executor itself says that whether the Constitution requires the president to enjoy unfettered authority to remove the head of an agency “depend[s] upon the character of the office.”

As the Supreme Court explained in Wiener v. United States(1958), “the most reliable factor for drawing an inference regarding the president’s power of removal . . . is the nature of the function that Congress vested” in the agency. The CFPB is characteristic of the administrative agencies for which the Supreme Court has upheld for-cause removal. InHumphrey’s Executor, the Court explained that “[i]n administering the [prohibition] of ‘unfair methods of competition’ — that is to say in filling in and administering the details embodied by that general standard — the [FTC] acts in part quasi-legislatively and in part quasi-judicially.” The CFPB has the same quasi-legislative and quasi-judicial responsibilities to define and enforce the prohibition of “unfair, deceptive, or abusive act[s] or practice[s]” in consumer finance, 12 U.S.C. § 5531, as well as to make rules and enforce enumerated consumer finance statutes, 12 U.S.C. § 5481(12).

Ultimately, the concern animating the removal cases is whether, as the Court said in Morrison v. Olson (1988), “the Executive Branch [retains] sufficient control . . . to ensure that the President is able to perform his constitutionally assigned duties.” It’s certainly plausible that the president could find that a single officer was guilty of “inefficiency, neglect of duty, or malfeasance in office.” In Bowsher v. Synar (1986), the Supreme Court said those “terms are very broad and . . . could sustain removal . . . for any number of actual or perceived transgressions . . . .” But it is quite difficult to envision a scenario in which the president could plausibly claim that a majority of an agency’s commissioners met the criteria for removal. Moreover, responsibility for the failures of an agency headed by a multi-member commission are inherently more diffuse than for an agency with a single-director, giving the president less ability to identify the source of “inefficiency” and “neglect” in a multi-member commission than a single director. So PHH’s proposed rule – that the president’s removal power can only be limited for multi-member agencies – has it backwards. If anything, limitations on the removal power for a multi-member agency would be more suspect than those limitations on single-director agencies, so it’s not surprising that PHH cannot cite a single case adopting their proposed rule.

A decision striking down the CFPB’s structure would not only break new constitutional ground, it would have wide-reaching practical consequences as well. Such a holding would mean that the structures of at least three other agencies are also unconstitutional because they are headed by a single official removable only for cause:

the Office of Special Counsel, 5 U.S.C. § 1211(b) (removal “only for inefficiency, neglect of duty, or malfeasance in office”); and

the Social Security Administration, 42 U.S.C. § 902(a)(3) (removal “only pursuant to a finding by the President of neglect of duty or malfeasance in office”).

For the president to remove the head of a fifth agency, the Office of the Comptroller of the Currency, “reasons” for the removal must be “communicated by [the President] to the Senate,” 12 U.S.C. § 2, suggesting that the president does not have the power to do so without cause. So if the attack on the CFPB’s structure succeeds, it will not hit the CFPB alone.

Unfortunately, PHH could hardly be more fortunate in thepanel drawn to decide this issue. All three judges were appointed by Republican presidents. One judge on the panel has suggested in a prior case that he believes the Constitution would be best interpreted to require that all agency heads be removable by the president without cause and that the Supreme Court was mistaken when it decided otherwise 80 years ago. But even if the three-judge panel rules that the CFPB’s structure is unconstitutional, it will hardly have the last word: The CFPB can seek further review by the full D.C. Circuit and the Supreme Court.

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